Tuesday, July 19, 2016

Future Schacht, V: America’s Political Defection

Having chosen to finance the First World War by taking on debt instead of raising taxes, the Second Reich was in bad financial shape by the time the Armistice was declared.  The country’s commercial banks had been discounting accommodation bills (bills backed only by a general promise to pay, not a claim on a specific asset or revenue stream) at a tremendous rate.  As Hjalmar Schacht recalled,
August Thyssen. He does look like an elderly Lenin!
The advances on bills of exchange of which Thyssen [August Thyssen, a German financier, one of the wealthiest men in the country] was wont to avail himself did not always conform to Reichsbank commercial bills, but he made use of them because they were the cheapest.  One could not always tell at first sight whether a bill was destined for payment of a goods transaction and therefore a genuine commercial bill, or whether it would simply be used as an accommodation bill to obtain cash (monetary) credit. (Schacht, Confessions of “The Old Wizard”, op. cit., 134.)
A great deal of financial chicanery went on.  On one occasion, Thyssen (of whom Schacht remarked he looked like a Lenin in old age) floated a loan to himself of 10 million Reichsmarks.  When the head of a major bank refused to discount the bills on the grounds that they were not “real bills” (commercial paper) and were secured by the issuer, and he had never in his life accepted such accommodation paper, Thyssen immediately proposed that the bank issue 10 million Reichsmarks in bills as a loan to him, which he would accept on his personal credit!  Schacht remarked, “I don’t remember how the matter worked out.  But one thing is certain — the [bank] credited the amount.” (Ibid.)  In other words, Thyssen put pressure on the bank with his financial and political connections, and forced it to make him an unsound loan on his terms.
Albert Ballin, businessman
By 1917, both sides in the war were in very bad shape.  It looked as though things might very soon end in a draw.  In April, however, everything changed when the U.S. entered the war.  As Schacht explained,
Conditions in the countries of both groups of belligerents appeared to be fairly similar.  Albert Ballin had hoped that the war would end in a complete political fiasco which would give businessmen a chance of enlisting the voice of reason on their side.  That hope might even then have been realized.  That it was not was due to the intervention of a third, extra-European Power in the progress of the war.  The United States at the beginning threw in their economic potential and later their armies to Europe, thus deciding the war in favor of the Entente Powers. (Ibid., 147.)
This meant that the so-called Armistice was anything but.  The Entente Powers were determined not merely to make Germany and Austria-Hungary pay legitimate reparations, but to assume the total cost of the war as well as punitive damages, such as Bismarck had levied on France in 1871 in an effort to destroy France economically forever.
Woodrow Wilson, ineffective president.
This would probably not have been possible had someone other than Woodrow Wilson led the United States.  For all his rhetoric and Fourteen Points for Peace, Wilson was ill-equipped to deal with a Great Britain and, especially, France out for revenge — which, backed by American financial and military might, they were well able to exact.  As Schacht commented,
It is not for me to go into the reasons for the entry of the United States into the war.  It is a fact, however — as I wrote later in my book The End of Reparations — that in so doing she assumed a political responsibility with which, at that time, she was not yet fit to cope.  This is not, in my opinion, an unfair criticism.  Many Americans have condemned America’s political defection after the war far more harshly than I have done. (Ibid., 147-148.)
For “the United States” read “the leadership of the United States,” and there is no reason to think that Schacht was in any way speaking beyond his book.  It is hard to imagine that had Theodore Roosevelt been elected in 1912, he would not have been re-elected in 1916, and that, as a delegate at Versailles, he would have let anyone walk all over him the way Wilson did.  Germany and Austria-Hungary would have been treated fairly, Hitler would not have come to power, and World War II would never have occurred.
Theodore "Don't Bully Me" Roosevelt, effective president.
The social and economic strains in Germany added to the financial weakness made for a very unstable situation.  Communist, socialist, and anarchist groups began agitating for revolution, with the lid only being kept on by widespread public apathy as a stunned population simply drifted from one bad situation to the next.  As Schacht recalled,
Toward midday on November 9 [1918] I came out of the Hotel Esplanade with a friend and saw the first lorries drive across the Potsdamer-Platz filled with heavily armed Red troops.  It was a curious sight.  People passed by the lorries looking depressed and indifferent — they did not even glance at them.  The Red revolutionists shouted, brandished their rifles and generally threw their weight about.  In among them, before and behind, the usual midday Potsdamer-Platz traffic carried on.  A very curious significant scene, expressive of German’s disrupted condition — revolution in lorries, apathy in the streets. (Ibid., 137.)
Worse, however, was to come

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